<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 8, 1996
JONES MEDICAL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 0-15098 43-1229854
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
</TABLE>
1945 Craig Road, St. Louis, MO 63146
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 576-6100
___________________________________________________________________
(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
As previously reported pursuant to a Current Report on Form 8-K dated
August 30, 1996 (and a related subsequent amendment thereto providing
supplemental financial data), Jones Medical Industries, Inc. (the "Company" or
"JMED") completed on August 30, 1996, the acquisition of Galen Drugs of
Florida, Inc. ("Galen"), including Galen's principal operating subsidiary,
Daniels Pharmaceuticals, Inc., and related real estate (the "Daniels
Acquisition"). The Daniels Acquisition is being accounted for as a "pooling of
interests" for financial reporting purposes.
In order to provide more complete information than is required in
conjunction with the Current Report on Form 8-K dated August 30, 1996, relating
to the Daniels Acquisition, the Company has decided to file at this time:
(i) a restatement of the 5-year Selected Financial Data originally
filed as Item 6 in its Form 10-K Annual Report for the year ended December 31,
1995, to give effect to the three-for-two split of the Company's common stock
effective June 10, 1996 and the restatement of such data arising from the
Daniels Acquisition;
(ii) a restatement of Management's Discussion and Analysis of
Financial Condition and Results of Operations as originally filed as Item 7 in
its Form 10-K Annual Report for the year ended December 31, 1995, to give
effect to the restatement thereof arising from the Daniels Acquisition; and
<PAGE> 2
(iii) as an exhibit hereto, the Company's restated audited financial
statements as of December 31, 1994 and 1995 and for each of the three years
in the period ended December 31, 1995, again reflecting the pooling of
interests arising from the Daniels Acquisition.
SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial
data of the Company which should be read in conjunction with the accompanying
consolidated financial statements of the Company, and the notes thereto. The
financial data as of December 31, 1995 and 1994, and for each of the three
years in the period ended December 31, 1995 have been derived from the audited
consolidated financial statements of the Company restated to reflect (i) a
three-for-two stock split pursuant to a 50% stock dividend distributed on
June 10, 1996 and (ii) the Daniels Acquisition on August 30, 1996, in a
transaction accounted for as a pooling of interests. The financial data as of
December 31, 1993, 1992 and 1991 and for each of the two years in the period
ended December 31, 1992, has been combined by the Company using the Company's
audited historical financial statements for those periods and unaudited
financial data concerning Galen and Galen's subsidiaries. In the opinion of
management of the Company, all adjustments necessary for a fair presentation of
the restated results arising from the pooling of interests are reflected. In
the following summary consolidated financial data, fiscal years of Galen ended
September 30 have been combined with the Company's historical results for years
ended December 31. See Note 4 of the Notes to Consolidated Financial
Statements appearing elsewhere in this report.
<PAGE> 3
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $29,098,300 $34,590,117 $55,620,958 $62,153,975 $74,791,815
Cost of Sales 14,959,738 17,501,215 26,500,879 29,502,923 32,754,390
----------- ----------- ----------- ----------- -----------
Gross Profit 14,138,562 17,088,902 29,120,079 32,651,052 42,037,425
Selling, general and administrative
expenses 9,260,569 10,738,350 16,794,635 20,284,788 21,754,155
----------- ----------- ----------- ----------- -----------
Operating income 4,877,993 6,350,552 12,325,444 12,366,264 20,283,270
Other income (expense) 546,981 821,467 (80,061) (486,198) (483,520)
----------- ----------- ----------- ----------- -----------
Income before taxes 5,424,974 7,172,019 12,245,383 11,880,066 19,799,750
Provision for taxes 1,983,599 2,671,690 4,660,826 4,360,168 7,410,491
----------- ----------- ----------- ----------- -----------
Net income (1) $ 3,441,375 $ 4,500,329 $ 7,584,557 $ 7,519,898 $12,389,259
----------- ----------- ----------- ----------- -----------
Weighted average shares outstanding(2) 34,915,674 35,211,967 35,228,601 26,360,757 24,843,953
Earnings per common and common equivalent $0.10 $0.13 $0.22 $0.29 $0.50
share (1)
Cash dividends declared per share(3) $0.027 $0.033 $0.04 $.045 $.05
</TABLE>
(1) Net income and earnings per share in 1993 do not reflect cumulative effect
of change in accounting principle of $207,100.
(2) In a transaction in October 1993, Galen repurchased and retired
approximately 78.6% of its then outstanding common stock in exchange for
consideration consisting of $3.4 million in cash and debt. As a result of the
Daniels Acquisition, an aggregate of 10.9 million shares of the Common Stock of
JMED were deemed to be outstanding prior to the date of that transaction.
(3) Represents historical dividends declared per share of JMED Commmon Stock.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------------
BALANCE SHEET DATA: 1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $36,989,266 $39,580,925 $58,112,520 $63,342,382 $86,238,408
Current assets $20,305,766 $22,743,724 $22,232,384 $26,384,883 $33,161,862
Current liabilities $4,165,281 $4,661,994 $7,823,121 $7,951,511 $14,405,444
Working capital $16,140,485 $18,081,730 $14,409,263 $18,433,372 $18,756,418
Long-term debt $2,889,448 $652,245 $5,399,986 $6,778,335 $11,420,362
Shareholders equity $29,361,546 $33,396,344 $40,832,212 $44,477,800 $55,938,525
Per share book value (4) $0.84 $0.96 $1.17 $1.84 $2.31
Current ratio 4.9:1 4.9:1 2.8:1 3.3:1 2.3:1
</TABLE>
(4) Per share book value is computed assuming conversion of the outstanding
preferred stock.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements.
The following discussion, although relating to the years ended December 31,
1995, reflects the Daniels Acquisition on August 30, 1996, in a transaction
accounted for as a pooling of interests. The following discussion does NOT
reflect other developments during 1996. Readers should refer to the Company's
Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and
September 30, 1996 and to Current Reports filed on Form 8-K.
Overview
The Company was founded in 1981 to market and distribute specialty
pharmaceuticals and nutritional supplements. At December 31, 1995, prior to
the Daniels Acquisition, the Company had completed 13 acquisitions of products
and businesses which complemented or expanded the Company's business, while
adding selected manufacturing capacity to support certain product lines. The
Company has achieved significant increases in sales and net income through such
acquisition activity and through related internal growth initiatives to develop
marketing opportunities with respect to the acquired product lines. Sales and
net income have increased from $27.6 million and $2.9 million in 1990,
respectively, to $74.8 million and $12.4 million in 1995, respectively,
representing five-year compounded annual growth rates of approximately 22.0% in
sales and 33.7% in net income.
Sales are reported net of returns during the period in which product is
shipped. These sales are subsequently adjusted for reserves incurred due to
volume or other contractual discounts on certain pharmaceuticals under
contracts with hospitals and hospital buying groups. As of December 31, 1995,
the Company maintained a reserve of $1.7 million for such anticipated
discounts. The reserve was increased from $1.2 million as of year-end 1994 due
to higher sales levels of the products involved. Product returns, both of
unused pharmaceuticals and of nutritional supplements sold to consumers subject
to a limited money-back refund policy, are less than 1% of gross annual sales.
Sales are reflected prior to royalties due on sales of certain pharmaceuticals
arising from product line acquisitions. Such royalties are recorded as a
selling expense. Royalty arrangements typically extend for a fixed period from
the date of acquisition and do not require minimum payments to maintain
ownership or any rights to products.
During the year ended December 31, 1995, sales were $74.8 million comprised
of $44.3 million of pharmaceutical sales and $30.5 million of nutritional
supplement sales. The relative contributions of pharmaceuticals and
nutritional supplements to the Company's sales can be influenced by acquisition
activity in each product category as well as by marketing activity and customer
demand. In 1993 the Company increased its presence in the marketing of
nutritional supplements as a result of its acquisition of the operations of
Bronson Pharmaceutical. In the fourth quarter of 1994 and first quarter of
1995, sales ofcertain of its thrombin-based hemostats were adversely
<PAGE> 5
impacted by supply difficulties. In August 1995 the Company acquired domestic
rights to the Brevital pharmaceutical line for $14 million and a 10-year
royalty of 5% on net sales of Brevital. During the last four months of 1995,
sales of Brevital represented approximately 3.2% of total Company sales.
The Company intends to seek additional acquisitions of product lines of
niche-market pharmaceuticals to leverage its existing distribution channels and
marketing infrastructure and to market aggressively new formats or formulations
of existing products. The success of the Company's efforts is subject to a
number of risks and uncertainties including its dependence upon key
pharmaceuticals and integration of new product acquisitions, its reliance upon
third-party manufacturers to produce certain key products, its ability to
effectively manage a changing business, uncertainties related to pharmaceutical
pricing and reimbursement and on the uncertainty of competitive forces within
the pharmaceutical and nutritional supplement industries which affect both the
market for its products and the availability of suitable product lines of
acquisition. The future results of operations, both annually and from
quarter-to-quarter, are subject to a variety of factors applicable to the
Company and to the industries and markets in which it operates.
Results Of Operations
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained elsewhere herein. The following table sets forth certain
data as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Percentage of Sales
Year Ended December 31,
----------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 47.6 47.5 43.8
----- ----- -----
Gross profit on sales 52.4 52.5 56.2
Selling, general & administrative expenses 30.2 32.6 29.1
----- ----- -----
Operating income 22.2 19.9 27.1
Other income (expenses)
Interest income 0.3 0.2 0.4
Interest expense (0.7) (1.1) (0.8)
Other miscellaneous income (expenses) 0.2 0.1 (0.2)
----- ----- -----
Income before income tax* 22.0 19.1 26.5
----- ----- -----
Net income* 13.6% 12.1% 16.6%
===== ===== =====
- ---------------------
</TABLE>
* Before cumulative effect of change in accounting principle of $207,100 in
1993.
<PAGE> 6
Sales
The following summarizes approximate sales activity by product
categories:
<TABLE>
<CAPTION>
Sales by Product 1993 % 1994 % 1995 %
Category ---- - ---- - ---- -
----------------
<S> <C> <C> <C> <C> <C> <C>
Pharmaceuticals $33,574,000 60.4% $36,530,000 58.8% $44,331,000 59.3%
Nutritional Supplements 22,047,000 39.6% 25,624,000 41.2% 30,461,000 40.7%
------------ ---- ----------- ---- ----------- ----
Total Sales $55,621,000 100% $62,154,000 100% $74,792,000 100%
</TABLE>
Sales for the year ended December 31, 1995 increased 20.3% to $74.8
million from $62.2 million for the year ended December 31, 1994 and 11.7% to
$62.2 million from $55.6 million for the year ended December 31, 1993. The
Company's sales increased in 1995 and 1994 as the result of unit and dollar
growth in both pharmaceuticals and nutritional supplements.
Sales of pharmaceuticals in 1995 grew 21.4% to $44.3 million from
$36.5 million in 1994 due primarily to increases in sales of the Company's
Thrombin and Levothyroxine products, and from the inclusion of four months of
Brevital sales. Sales of nutritional supplements in 1995 grew 18.9% to $30.5
million from $25.6 million in 1994 due to a 14.5% increase in Bronson
Pharmaceutical product sales and a 102.2% increase in sales of contract
manufactured products, offset in part by a 27.5% decline in sales of the MD
Pharmaceutical products.
Sales of pharmaceuticals in 1994 grew 8.8% to $36.5 million from $33.6
million in 1993 due primarily to increases in sales of Levoxyl, Soloxine,
Therevac and Liqui-Char. Sales of Thrombin products were essentially flat due
to the inability of the Company's supplier to meet fully the Company's
requirements. Sales of nutritional supplements in 1994 increased 16.2% to
$25.6 million from $22.0 million in 1993 resulting from the inclusion of a full
12 months of sales of the Bronson Pharmaceutical product line which was
acquired in March 1993.
Gross Profit
Gross profit during 1995 increased 28.7% or $9.4 million to $42.0
million from $32.7 million in 1994. As a percentage of sales, margins grew to
56.2% in 1995 from 52.5% in 1994 as a result of greater manufacturing
efficiencies and sales increases in higher margin products.
Gross profit during 1994 increased 12.1% or $3.5 million to $32.7
million from $29.1 million in 1993. As a percentage of sales, margins were
essentially unchanged at 52.5% in 1994 from 52.4% in 1993.
<PAGE> 7
Selling, General and Administrative Expenses
Selling expenses increased 6.0% or $722,000 to $12.7 million in 1995
from $12.0 million in 1994 primarily as a result of opening new sales
territories in 1995 and due to higher direct marketing expenses associated with
larger and more frequent mailings of the Bronson Pharmaceutical catalogue. As
a percentage of sales, these expenses decreased to 17.0% in 1995 from 19.2% in
1994.
Selling expenses increased 27.0% or $2.5 million to $12.0 million in
1994 from $9.4 million in 1993 as a result of the inclusion of a full 12 months
of Bronson Pharmaceutical selling expenses and greater shipping and direct
marketing expenses associated with sales of Bronson Pharmaceutical products.
Additionally, the Company opened new sales territories during 1994. Selling
expenses as a percentage of sales in 1994 increased to 19.2% from 16.9% in
1993.
General and administrative expenses in 1995 increased 11.4% or
$735,000 to $7.2 million from $6.5 million in 1994 primarily as a result of
higher salaries and overhead, but declined as a percentage of sales to 9.6% in
1995 from 10.4% in 1994.
General and administrative expenses in 1994 increased 15.5% or
$868,000 to $6.5 million from $5.6 million in 1993 primarily due to the
inclusion of a full 12 months of Bronson Pharmaceutical expenses and to a
lesser extent due to increases in overhead. As a percentage of sales, these
expenses increased to 10.4% in 1994 from 10.1% in 1993 for the same reasons.
Research and development expenses were essentially unchanged at
$452,000 in 1995 and $507,000 in 1994 after declining from $660,000 in 1993
primarily due to the reduction of ongoing expenses by GenTrac associated with
the development of pre-mixed liquid thrombin formulations.
Amortization expenses associated with intangible assets and included
in selling, general and administrative expenses remained essentially unchanged
in 1995 at approximately $1.4 million, as the impact of the Brevital product
line acquisition was substantially offset by declining amortization on other
products. As a percentage of sales these expenses decreased to 1.9% in 1995
from 2.2% in 1994.
Amortization expenses increased 20.8% or $234,000 to $1.4 million in
1994 from $1.1 million in 1993 as a result of the Bronson Pharmaceutical and
Derma System product acquisitions and the corresponding full 12 months of
amortization of the associated intangible assets acquired. Also, as a percent
of sales, amortization expenses increased to 2.2% in 1994 from 2.0% in 1993.
Operating Income
Operating income during 1995 increased 64.0% or $7.9 million to $20.3
million from $12.4 million in 1994, and increased as a percentage of sales to
27.1% from 19.9% in 1994, as the result of higher overall gross profits and
marginal increases in operating expenses.
<PAGE> 8
Operating income was essentially unchanged during 1994 at $12.4
million from $12.3 million in 1993, and decreased as a percentage of sales to
19.9% from 22.2% in 1993, as a result of an increase in cost of sales and in
selling, general and administrative expenses.
Other Income (Expense)
Other income during 1995 reflects a one time loss of $126,000
associated with the sale of certain real property which the Company was unable
to use and the reduction in the associated rental income. This loss was offset
primarily from an increase in interest income from higher cash balances on hand
during 1995 compared to 1994.
Interest and dividends from investing activities decreased to $144,000
in 1994 from $201,000 in 1993 due to lower cash balances resulting from the
uses of cash in 1993 associated with the Company's acquisition program and the
purchase of a 150,000 square foot distribution and headquarters facility.
Interest expense increased to $698,000 in 1994 from $382,000 in 1993 due to
borrowings associated with the acquisitions and facility purchase.
Income Taxes
The provision for income taxes increased to 37.4% of pre-tax income in
1995 compared to 36.7% of pre-tax income in 1994, primarily as the result of a
1% higher federal tax rate on annual profits exceeding $10 million.
The provision for income taxes decreased to 36.7% of pre-tax income in
1994 compared to 38.1% of pre-tax income in 1993. The lower rate was due to
lower effective state income tax rates.
Net Income
Net income increased 64.8% or $4.9 million to $12.4 million in 1995
from $7.5 million in 1994, and increased as a percentage of sales to 16.6% in
1995 from 12.1% in 1994.
Net income decreased .8% or $65,000 to $7.5 million in 1994 from $7.6
million in 1993, and decreased as a percentage of sales to 12.1% in 1994 from
13.6% in 1993 as a result of lower operating and interest income and higher
interest expense.
FINANCIAL CONDITION
Balance Sheet Information
The Company's current ratio declined to 2.3:1 as of December 31, 1995
from 3.4:1 as of December 31, 1994, working capital increased to $18.8 million
as of December 31, 1995 from $18.4 million as of December 31, 1994, and debt as
a percentage of equity increased to 30.8% as of December 31, 1995 from 19.2% as
of December 31, 1994, primarily as a result of the August
<PAGE> 9
31, 1995 acquisition of the Brevital product line and the associated debt
incurred in connection therewith.
Liquidity and Capital Resources
Since inception the Company has financed its operations primarily
through cash flow from operations, public and private sales of equity
securities and borrowings under revolving credit facilities. At December 31,
1995 and 1994, respectively, the Company had cash and cash equivalents of $8.3
million and $8.5 million, respectively.
Total assets increased $22.9 million to $86.2 million at December 31,
1995 from $63.3 million at December 31, 1994 and total liabilities increased
$11.4 million to $30.3 million at December 31, 1995 from $18.9 million at
December 31, 1994. Inventories increased to $13.0 million at December 31, 1995
from $10.3 million at December 31, 1994 principally from higher thrombin
product inventories and the acquired Brevital inventories. Accounts receivable
increased to $9.4 million at December 31, 1995 from $5.8 million at December
31, 1994 due to higher year end sales in 1995. For the same reason, in days
outstanding, accounts receivable increased to 45 days at December 31, 1995 from
33 days at December 31, 1994. Net property, plant and equipment increased by
$3.5 million to $18.7 million at December 31, 1995, from $15.2 million at
December 31, 1994, primarily due to the expansion of the Company's GenTrac
facility.
In August 1995, the Company borrowed $8.7 million to fund its cash
requirements in connection with its acquisition of the exclusive United States
license to sell Brevital and to refinance existing term loan indebtedness of
$1.7 million, with interest thereon at the rate of 0.5% below prime, payable in
equal monthly installments until paid in full in September 2000. Such
indebtedness is secured by substantially all of the Company's assets. The
Company may prepay such indebtedness without penalty. As of December 31, 1995,
the outstanding balance of this term loan was $7.8 million. In addition, the
Company is indebted to Lilly in the principal amount of $7.0 million bearing
interest at 7.0% and due in installments of $4.0 million in August 1996 and
$3.0 million in August 1997.
Under revolving credit and other borrowing lines available to the
Company at January 31, 1996, the Company had an unused line of credit
aggregating $4.0 million. Such line of credit is secured by substantially all
of the Company's assets and contains certain restrictive provisions, including
maintaining a maximum tangible net worth ratio, maintaining a minimum current
ratio, obtaining prior approval of acquisition financings in excess of $3.0
million and limiting the amount of additional borrowings. The Company will be
in default under its revolving credit and borrowing lines if (i) Dennis Jones
ceases to be the Company's Chairman of the Board and Chief Executive Officer,
or (ii) Dennis Jones and Judith Jones, collectively, own less than 15% of the
outstanding shares of Common Stock of the Company, or (iii) a third party
acquires 50% or more of the shares of the Company's capital stock without the
lender's prior approval.
The Company has experienced only moderate raw material and labor price
increases in recent years. While the Company has passed some price increases
along to customers, the Company has primarily benefitted from rapid sales
growth, negating most inflationary pressures.
<PAGE> 10
The Company's manufacturing operations are not capital intensive and,
as such, the impact of inflation on the property, plant and equipment and
associated depreciation expense of the Company has been minimal.
Recent Accounting Pronouncements
Adoption of FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the
adoption of FASB Statement No. 123, "Accounting for Stock Based Compensation",
which are effective for the Company in 1996, are not anticipated to have a
material effect on the Company's consolidated financial statements.
Effective January 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the liability method
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The cumulative effect of adopting Statement No. 109 as of
January 1, 1993 was to increase net income by $207,100. Application of the new
income tax rules for 1993 did not have a significant effect on net income
before cumulative effect of the accounting change.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Hacker, Johnson, Cohen & Grieb
27.1 Financial Data Schedule.
99.1 Independent Auditors' Report of Ernst & Young
LLP.
99.2 Independent Auditors' Report of Hacker, Johnson,
Cohen & Grieb.
99.3 Restated audited financial statements of the Company as of
December 31, 1994 and 1995 and each of the three years in
the period ended December 31, 1995 reflecting the pooling of
interests arising from the Daniels Acquisition.
</TABLE>
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
JONES MEDICAL INDUSTRIES, INC.
By: /s/ Dennis M. Jones
---------------------------
Name: Dennis M. Jones
Title: President
Date: November 8, 1996
<PAGE> 1
Consent of Independent Auditors
We consent to the incorporation by reference into the registration statement on
Form No. S-8 33-401841 of The 1989 Incentive Stock Option Plan and the 1982
Incentive Stock Option Plan of Jones Medical Industries, Inc. of our report
dated February 12, 1996 (except for the first paragraph of Note 4 as to which
the date is March 18, 1996 and except for Note 1 as to which the date is August
30, 1996) with respect to the restated consolidated financial statements
of Jones Medical Industries, Inc. for the years ended December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995
included in its Current Report on Form 8-K dated November 8, 1996.
St. Louis, Missouri
November 6, 1996
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Jones Medical Industries, Inc.:
We consent to the use of our report dated April 25, 1996, except for Note 16 as
to which the date is July 30, 1996, with respect to the consolidated balance
sheets of Galen Drugs of Florida, Inc. and subsidiaries as of September 30,
1995, 1994 and 1993, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the years then ended, which
report appears in the Form 8-K of Jones Medical Industries, Inc., dated November
8, 1996.
HACKER, JOHNSON, COHEN & GRIEB
Tampa, Florida
November 8, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JONES
MEDICAL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT FOR THE
YEAR ENDED DECEMBER 31, 1995 AS RESTATED TO REFLECT THE ACQUISITION OF GALEN
PHARMACEUTICALS, INC. AND ITS PRINCIPAL OPERATING SUBSIDIARY, DANIELS
PHARMACEUTICALS, INC., ACCOUNTED FOR AS A POOLING OF INTERESTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,341,823
<SECURITIES> 0
<RECEIVABLES> 9,625,591
<ALLOWANCES> 187,484
<INVENTORY> 13,014,276
<CURRENT-ASSETS> 33,337,031
<PP&E> 18,659,500
<DEPRECIATION> 3,848,560
<TOTAL-ASSETS> 86,238,408
<CURRENT-LIABILITIES> 14,405,444
<BONDS> 17,233,836
0
0
<COMMON> 969,097
<OTHER-SE> 54,969,418
<TOTAL-LIABILITY-AND-EQUITY> 86,238,408
<SALES> 74,791,815
<TOTAL-REVENUES> 74,791,815
<CGS> 32,754,390
<TOTAL-COSTS> 32,754,390
<OTHER-EXPENSES> 132,606
<LOSS-PROVISION> 63,918
<INTEREST-EXPENSE> 655,003
<INCOME-PRETAX> 19,799,750
<INCOME-TAX> 7,410,491
<INCOME-CONTINUING> 12,389,259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,389,259
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
<PAGE> 1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Jones Medical Industries, Inc.
We have audited the accompanying consolidated balance sheets of Jones Medical
Industries, Inc. as of December 31, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the consolidated financial statements of Galen Drugs of Florida,
Inc., (acquired by the Company in a business combination accounted for as a
pooling of interests, as described in Note 1 to the consolidated financial
statements of Jones Medical Industries, Inc.) which statements reflect total
assets of $10,649,322 and $7,522,655 as of September 30, 1995 and 1994,
respectively and total revenues of $18,394,720, $14,605,172 and $12,405,460 for
each of the three years in the period ended September 30, 1995, respectively.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for Galen
Drugs of Florida, Inc., is based solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Jones Medical
Industries, Inc. at December 31, 1995 and 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 10 to the consolidated financial statements, in 1993, the
Company changed its method of accounting for income taxes.
ERNST & YOUNG LLP
St. Louis, Missouri
February 12, 1996, except for the first
paragraph of Note 4 as to which the date
is March 18, 1996 and except for Note 1
as to which the date is August 30, 1996
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Galen Drugs of Florida, Inc.
St. Petersburg, Florida:
We have audited the accompanying consolidated balance sheets of Galen Drugs of
Florida, Inc. and Subsidiaries (the "Company") as of September 30, 1995, 1994
and 1993 and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 1995, 1994 and 1993 and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
HACKER, JOHNSON, COHEN & GRIEB
Tampa, Florida
April 25, 1996, except for Note 16 as to which
the date is July 30, 1996.
<PAGE> 1
EXHIBIT 99.3
JONES MEDICAL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 8,542,757 $ 8,341,823
Accounts receivable, less allowance for doubtful accounts of
$113,347 in 1994 and $187,484 in 1995.......................... 5,799,950 9,438,107
Inventories...................................................... 10,288,063 13,014,276
Deferred income taxes............................................ 1,198,617 1,546,100
Other............................................................ 555,496 821,556
Note Receivable.................................................. 255,357 175,169
----------- -----------
Total current assets.......................................... 26,640,240 33,337,031
Intangible assets:
Customer lists................................................... 6,084,967 6,084,967
Distribution systems, trademarks and licenses.................... 11,836,110 24,336,110
Restrictive covenants and other intangibles...................... 2,208,710 3,142,328
Goodwill......................................................... 4,636,813 4,255,298
----------- -----------
24,766,600 37,818,703
Less accumulated amortization.................................... 4,092,394 4,883,538
----------- -----------
Net intangible assets.............................................. 20,674,206 32,935,165
Net property, plant and equipment.................................. 15,171,382 18,659,500
Other assets....................................................... 856,554 1,306,712
----------- -----------
Total assets.................................................. $63,342,382 $86,238,408
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................ $ 5,569,769 $ 7,436,964
Current portion of long-term debt................................ 1,746,551 5,813,474
Income taxes payable............................................. 400,433 871,401
Dividends payable................................................ 234,758 283,605
----------- -----------
Total current liabilities..................................... 7,951,511 14,405,444
Long-term debt..................................................... 6,778,335 11,420,362
Deferred income taxes.............................................. 4,134,736 4,474,077
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000,000 shares authorized,
99,919 shares issued and outstanding in 1994 and 1,056 in 1995
($2,248,000 aggregate liquidation preference in 1994 and
$24,000 in 1995).............................................. 999 10
Common Stock, $0.04 par value; 30,000,000 shares authorized,
23,730,008 shares issued and outstanding in 1994 and
24,227,423 in 1995............................................ 949,200 969,097
Contributed capital (including effects of unearned compensation
and related amortization)..................................... 19,507,276 19,590,417
Retained earnings................................................ 24,020,325 35,379,001
----------- -----------
Total stockholders' equity.................................... 44,477,800 55,938,525
----------- -----------
Total liabilities and stockholders' equity.................... $63,342,382 $86,238,408
=========== ===========
</TABLE>
See accompanying notes.
<PAGE> 2
JONES MEDICAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales.................................................. $55,620,958 $62,153,975 $74,791,815
Cost of sales.......................................... 26,500,879 29,502,923 32,754,390
----------- ----------- -----------
Gross profit........................................... 29,120,079 32,651,052 42,037,425
Selling, general and administrative expenses:
Selling.............................................. 9,417,108 11,956,990 12,679,189
General and administrative........................... 5,590,227 6,457,842 7,192,877
Research and development............................. 658,597 507,020 452,285
Amortization......................................... 1,128,703 1,362,936 1,429,804
----------- ----------- -----------
Total selling, general and administrative expenses..... 16,794,635 20,284,788 21,754,155
----------- ----------- -----------
Operating income....................................... 12,325,444 12,366,264 20,283,270
Other income (expense):
Interest income...................................... 201,235 144,473 304,089
Interest expense..................................... (382,766) (698,095) (655,003)
Miscellaneous........................................ 101,470 67,424 (132,606)
----------- ----------- -----------
Income before income taxes and cumulative effect of
change in accounting principle....................... 12,245,383 11,880,066 19,799,750
Provision for income taxes............................. 4,660,826 4,360,168 7,410,491
----------- ----------- -----------
Net income before cumulative effect of change in
accounting principle................................. 7,584,557 7,519,898 12,389,259
Cumulative effect of change in accounting principle.... 207,100
----------- ----------- -----------
Net income............................................. $ 7,791,657 $ 7,519,898 $12,389,259
=========== =========== ===========
Earnings per common and common equivalent share before
cumulative effect of change in accounting
principle............................................ $0.21 $0.29 $0.50
Cumulative effect of change in accounting principle.... 0.01 -- --
----- ----- -----
Earnings per common and common equivalent share........ $0.22 $0.29 $0.50
===== ===== =====
</TABLE>
See accompanying notes.
<PAGE> 3
JONES MEDICAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------- PREFERRED COMMON CONTRIBUTED RETAINED
PREFERRED COMMON STOCK STOCK CAPITAL EARNINGS TOTAL
--------- ------ ----- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 241,200 22,953,569 $2,412 $918,143 $19,168,822 $13,306,967 $33,396,344
Three-for-two Common Stock split declared
February 7, 1996 4,338,056 173,522 (173,522) 0
Three-for-two Common Stock split declared
May 22, 1996 6,507,084 260,283 (260,283) 0
Exercise of stock options 229,337 9,173 399,097 408,270
Restricted Stock:
Amortization of unearned compensation 132,500 132,500
Conversion of Preferred Stock (18,494) 72,779 (185) 2,911 (2,726) 0
Net income 7,791,657 7,791,657
Cash dividend declared-Common Stock
($0.04 per historical JMED share) (799,218) (799,218)
Cash dividend declared-Preferred Stock
($0.16 per share) (37,221) (37,221)
Adjustment for treasury stock activity-
pooled company (115,094) (4,604) (55,516) (60,120)
BALANCE AT DECEMBER 31, 1993 222,706 33,985,731 2,227 1,359,428 19,208,372 20,262,185 40,832,212
Exercise of stock options 144,225 5,769 415,156 420,925
Restricted stock:
Amortization of unearned compensation 30,470 30,470
Conversion of Preferred Stock (122,787) 483,465 (1,228) 19,339 (18,111) 0
Net income 7,519,898 7,519,898
Cash dividend declared-Common Stock
($0.045 per historical JMED share) (911,718) (911,718)
Cash dividend declared-Preferred Stock
($0.16 per share) (24,930) (24,930)
Adjustment for treasury stock activity
in November 1993 - pooled company (10,883,413) (435,336) (128,611) (2,825,110) (3,389,057)
BALANCE AT DECEMBER 31, 1994 99,919 23,730,008 999 949,200 19,507,276 24,020,325 44,477,800
Exercise of stock options 281,565 11,263 433,192 444,455
Restricted stock:
Amortization of unearned compensation 29,544 29,544
Conversion of Preferred Stock (54,859) 215,850 (549) 8,634 (8,085) 0
Return of escrowed Preferred Stock (44,004) (440) (380,836) (381,276)
Escrowed preferred dividend 9,326 9,326
Net income 12,389,259 12,389,259
Cash dividend declared-Common Stock
($0.05 per historical JMED share) (1,026,401) (1,026,401)
Cash dividend declared-Preferred Stock
($0.16 per share) (4,182) (4,182)
BALANCE AT DECEMBER 31, 1995 1,056 24,227,423 $10 $969,097 $19,590,417 $35,379,001 $55,938,525
</TABLE>
See accompanying notes
<PAGE> 4
JONES MEDICAL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
------------ ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................... $ 7,791,657 $ 7,519,898 $ 12,389,259
Noncash adjustments:
Cumulative effect of change in accounting
principle...................................... (207,100) -- --
Depreciation...................................... 741,717 912,348 1,109,480
Amortization...................................... 1,128,703 1,362,936 1,429,804
Provision for uncollectibles...................... 41,582 7,212 63,918
Deferred income taxes............................. (100,989) (270,992) (8,141)
(Gain)/loss on sale of assets..................... -- (1,471) 126,060
Change in assets and liabilities, net of effects
from acquisitions:
Accounts receivable............................... (1,869,491) 584,430 (3,702,075)
Inventories....................................... (3,838,151) 1,286,351 (2,726,213)
Other assets...................................... (489,878) 282,857 (716,218)
Accounts payable and accrued expenses............. (621,269) 273,752 1,867,195
Income taxes payable.............................. (737,977) 251,467 470,968
------------ ----------- ------------
Net cash from operating activities.................. 1,838,804 12,208,788 10,304,037
------------ ----------- ------------
INVESTING ACTIVITIES
Maturity (purchases) of certificates of deposit
and U.S. government obligations.................. (224,565) 1,247,489 --
Sales of marketable equity securities............. 108,755 3,515 --
Additions to property, plant and equipment........ (5,431,233) (3,688,322) (5,448,477)
Proceeds from sale of assets...................... -- 268,938 766,108
Purchases of intangible assets in product line
acquisitions..................................... (3,542,463) -- (14,072,278)
Purchase of Bronson Pharmaceuticals, Inc., net of
cash acquired.................................... (8,183,542) -- --
Adjustment for treasury stock activity-
pooled company.................................. (60,120) (169,453) --
Net increase(decrease) in notes receivable from
related party*................................... (209,383) (45,974) 80,188
------------ ----------- ------------
Net cash used for investing......................... (17,542,551) (2,383,807) (18,674,459)
------------ ----------- ------------
FINANCING ACTIVITIES
Proceeds from long-term debt...................... 8,000,000 -- 14,000,000
Repayment of long-term debt....................... (1,651,727) (2,134,295) (4,652,908)
Repayment of note payable to former
stockholder of pooled company.................... -- (105,942) (638,142)
Payments of cash dividends........................ (789,749) (934,495) (983,917)
Proceeds from exercise of stock options........... 408,270 420,925 444,455
------------ ----------- ------------
Net cash from (used for) financing.................. 5,966,794 (2,753,807) 8,169,488
------------ ----------- ------------
Increase (decrease) in cash and cash equivalents.... (9,736,953) 7,071,174 (200,934)
Cash and cash equivalents, beginning of year........ 11,208,536 1,471,583 8,542,757
------------ ----------- ------------
Cash and cash equivalents, end of year............ $ 1,471,583 $ 8,542,757 $ 8,341,823
============ =========== ============
</TABLE>
See accompanying notes
<PAGE> 5
JONES MEDICAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BASIS OF PRESENTATION
On August 30, 1996, the Company acquired Daniels Pharmaceuticals, Inc.
("Daniels"), a Florida corporation, in a business combination accounted for as a
pooling of interests by way of a merger (the "Merger") among Daniels, Daniels'
parent entity, Galen Drugs of Florida, Inc. ("Galen"), a Florida corporation,
and the Company's wholly owned subsidiary, JGD Acquisition Corporation, a
Florida corporation. The accompanying financial statements are based on the
assumption that the two companies were combined at the beginning of the year,
and all financial statements for prior periods presented have been restated to
give effect to the combination. Earning per share data reflects the shares
issued in the merger for all periods presented.
Daniels' principal product is Levoxyl, a synthetic thyroid hormone for the
treatment of hypothyroidism. Daniel's other products include Soloxine, a
branded formulation of Levothyrozine for veterinary treatment of
hypothyroidism.
In connection with the Merger, the Company issued 2,910,474 shares of its
Common Stock and paid cash consideration of approximately $4,022,000 to
dissenting shareholders (in lieu of 4,286 shares of JMED Common Stock). In
addition, JMED issued 49,750 shares of its Common Stock to Daniels Enterprises,
Inc. ("DEI"), a subchapter S-Corporation controlled by the principal
shareholders of Galen, to acquire the real estate associated with the business.
The book value of the real estate acquired was $892,000 at the consummation
date of the combination.
Nonrecurring merger expenses related to this acquisition totaled $5,664,585,
consist primarily of costs paid by shareholders on behalf of the Company,
investment banking and professional fees, and severance costs and will be
charged to the Company's operation in 1996.
In connection with the Merger, Daniels changed its fiscal year end from
September 30 to December 31, which conforms to JMED's year end. The
consolidated financial statements for all periods prior to 1996 have not been
restated to reflect Daniels' change in fiscal year and include Daniels' results
of operations on a September 30 fiscal year end basis and JMED's on a December
31 calendar year basis.
A reconciliation of the amounts of net sales and net income previously reported
for each of the three years in the period ended December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Sales:
As previously reported by JMED $43,215,498 $47,548,803 $56,397,095
Daniels 12,405,460 14,605,172 18,394,720
----------- ----------- -----------
As restated $55,620,958 $62,153,975 $74,791,815
=========== =========== ===========
Net Income:
As previously reported by JMED $ 6,410,913 $ 5,739,507 $ 9,328,304
Daniels 1,380,744 1,780,391 3,060,955
----------- ----------- -----------
As restated $ 7,791,657 $ 7,519,898 $12,389,259
=========== =========== ===========
</TABLE>
On February 7, 1996, the Board of Directors declared a three-for-two stock
split effected in the form of a stock dividend to be paid on March 1, 1996 to
holders of record on February 23, 1996. The financial statements, including
stock option, share, per share data, and market prices, have been retroactively
adjusted to reflect the split.
On May 22, 1996, the Board of Directors declared a three-for-two stock
split effected in the form of a stock dividend to be paid on June 10, 1996 to
holders of record on June 3, 1996. The financial statements, including stock
options, share and per share data, have been retroactively adjusted to reflect
the split.
<PAGE> 6
2. NATURE OF OPERATIONS AND CUSTOMER CONCENTRATION
Jones Medical Industries, Inc. and subsidiaries ("Company" or "JMED") is engaged
in the manufacturing, marketing, and sale of pharmaceuticals and nutritional
supplements. The Company's principal customers include consumers, retail
pharmacies, hospitals (through wholesale drug distributors), physicians, and the
United States government, of which sales to the United States government totaled
approximately $4,600,000, $4,500,000 and $3,250,000 in 1993, 1994, and 1995,
respectively. No one customer accounted for more than 10% of the Company's
consolidated sales in 1993, 1994, and 1995. The Company's most significant
product lines include Levoxyl, with sales totaling approximately $6,348,000,
$8,736,000 and $11,684,000 in 1993, 1994 and 1995, respectively, and a topical
hemostat with sales totaling approximately $13,126,000, $12,681,000, and
$14,573,000 in 1993, 1994, and 1995, respectively. The Company's only source of
supply for the topical hemostat product is from GenTrac, Inc. ("GenTrac"), a
wholly-owned subsidiary of the Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Jones Medical
Industries, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents in short-term money market accounts and other investments
with original maturities of less than three months are stated at cost plus
accrued interest and are considered to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market with cost determined
on the first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is computed
by the straight-line method over the useful life of the assets as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CATEGORY USEFUL LIFE
----------------------------------------------------------------- -----------
<S> <C>
Buildings and improvements....................................... 15-40 years
Equipment and furniture.......................................... 5-20 years
Automobiles...................................................... 5 years
</TABLE>
INTANGIBLE ASSETS
The cost of product line or business acquisitions is allocated first to
identifiable assets and liabilities based on estimated fair values. The excess
of cost over identifiable assets and liabilities is
<PAGE> 7
JONES MEDICAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded as goodwill. Amortization is provided using the straight-line method
over the estimated useful life of the assets as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CATEGORY USEFUL LIFE
----------------------------------------------------------------- -----------
<S> <C>
Customer lists................................................... 20 years
Distribution systems, trademarks, and licenses................... 5-30 years
Restrictive covenants and other intangibles...................... 5-10 years
Goodwill......................................................... 25-40 years
</TABLE>
The Company continually reevaluates the propriety of the carrying amount of
goodwill and other intangibles as well as the related amortization period to
determine whether current events and circumstances warrant adjustments to the
carrying values and/or revised estimates of useful lives. This evaluation is
based on the Company's projection of the undiscounted operating income before
depreciation, amortization, and interest over the remaining lives of the
amortization periods of related goodwill and intangible assets. The projections
are based on the historical trend line of actual results since the commencement
of operations and adjusted for expected changes in operating results. To the
extent such projections indicate that the undiscounted operating income (as
defined above) is not expected to be adequate to recover the carrying amounts of
related intangibles, such carrying amounts are written down by charges to
expense in amounts equal to the excess of the carrying amount of intangible
assets over the respective fair values. At this time, the Company believes that
no significant impairment of the goodwill and other intangibles has occurred and
that no reduction of the estimated useful lives is warranted.
REVENUE RECOGNITION
Sales are reported net of returns during the period in which product is
shipped. These sales are subsequently adjusted for reserves incurred due to
volume or other contractual discounts on certain pharmaceuticals under contracts
with hospitals and hospital buying groups. At December 31, 1995 and 1994, the
Company maintained a reserve of $1,935,116 and $1,543,313, respectively, for
such anticipated discounts.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share are based on the weighted
average number of shares of Common Stock and Common Stock equivalents
outstanding during each year (35,228,601 in 1993, 26,360,757 in 1994, and
24,843,953 in 1995) after giving retroactive effect to the following: i) a
three-for-two stock split effected in the form of a stock dividend declared
February 7, 1996, ii) a three-for-two stock split effected in the form of a
stock dividend declared May 22, 1996 and iii) the shares issued to consummate
the acquisition of Galen Drugs of Florida and its principal subsidiary Daniels
Pharmaceuticals, Inc. The computation assumes that outstanding stock options
were exercised and the proceeds used to purchase common shares. Outstanding
Preferred Stock was assumed to have been converted to Common Stock at the
issuance date.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," (APB 25) and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's incentive stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In connection with various nonqualified stock option plans, certain options
have been granted at exercise prices below the fair market value of the Common
Stock at the grant date. Differences
<PAGE> 8
JONES MEDICAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
between the option prices and fair market values at the dates of grant are
charged to compensation expense ratably over the future service vesting periods.
DIRECT-RESPONSE ADVERTISING
Costs associated with the production of the Company's direct-response mail
order catalog are capitalized and amortized over the expected period of future
benefit, which typically does not extend beyond six months. At December 31, 1994
and 1995, approximately $181,000 and $392,000, respectively, of capitalized
catalog costs are included in the accompanying balance sheets. Advertising
expense associated with the catalog in 1993, 1994, and 1995 totalled $584,000,
$902,000, and $1,223,000, respectively.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform to the 1995 presentation.
4. ACQUISITIONS
DANIELS PHARMACEUTICALS, INC.
TAPAZOLE(R)
On March 18, 1996, the Company entered into a perpetual licensing agreement
with Eli Lilly and Company ("Lilly") for the exclusive United States marketing
rights to the Tapazole(R) product line. The purchase price of approximately
$26.0 million was financed with short-term bank debt of $8.7 million and Lilly
financing of $17.3 million for six months. Approximately $24.0 million was
allocated to the perpetual license with an amortizable life of 30 years, and
$2.0 million was allocated to a restrictive covenant with an amortizable life
of 10 years. In connection with the acquisition, the Company entered into a
manufacturing agreement with Lilly whereby Lilly will manufacture and supply
the Company with Tapazole(R) for a period of at least ten years. In addition,
the Company agreed to pay Lilly royalties totalling 5% of net sales of
Tapazole(R) for a period of ten years.
Brevital
On August 31, 1995, the Company entered into a perpetual licensing
agreement with Eli Lilly and Company ("Lilly") for the exclusive United States
marketing rights to the Brevital product line. The purchase price of
approximately $14.0 million was financed with bank debt of $7.0 million and
Lilly financing of $7.0 million. Approximately $13.0 million was allocated to
the perpetual license with an amortizable life of 30 years, and $1.0 million was
allocated to a restrictive covenant with an amortizable life of 10 years.
Bronson Pharmaceuticals
On March 24, 1993, the Company acquired the outstanding stock of Bronson
Pharmaceuticals ("Bronson"), a California subchapter S corporation. The cost of
the acquisition of $10,500,000 has been recorded using the purchase method of
accounting, and the results of Bronson's operations, since the date of
acquisition, have been included in the Company's consolidated financial
statements. The excess of the purchase price over the estimated fair market
value of the net assets acquired of approximately $2,700,000 is being amortized
over 40 years using the straight-line method.
<PAGE> 9
JONES MEDICAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Derma System Professional Skin Care
On February 12, 1993, the Company acquired the Derma System Professional
Skin Care product line for approximately $3,500,000 which was paid in cash. The
entire purchase price was allocated to intangible assets, the majority of which
are being amortized over a useful life of 20 years.
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid the following amounts for interest and income taxes:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest................................... $ 396,391 $ 685,345 $ 502,022
Income taxes............................... $5,380,159 $4,333,298 $7,007,200
Note payable to former stockholder issued
in connection with repurchase of common
stock of pooled company ................... - $3,219,604 -
</TABLE>
6. INVENTORIES
Inventories at December 31, 1994 and 1995 are comprised of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Raw materials........................................ $ 3,826,607 $ 5,613,815
Work-in-process...................................... 1,030,511 1,130,532
Finished goods....................................... 5,430,945 6,269,929
----------- -----------
Total inventories.................................... $10,288,063 $13,014,276
=========== ===========
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Land................................................ $ 2,418,009 $ 2,397,755
Buildings and improvements.......................... 7,869,482 9,211,085
Equipment and furniture............................. 7,306,343 10,031,272
Leasehold improvements.............................. 274,206 406,246
Automobiles......................................... 383,407 461,702
----------- -----------
18,251,447 22,508,060
Less accumulated depreciation....................... 3,080,065 3,848,560
----------- -----------
Net property, plant and equipment................... $15,171,382 $18,659,500
=========== ===========
</TABLE>
<PAGE> 10
JONES MEDICAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1994 and 1995 are
comprised of the following:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Trade payables....................................................... $1,723,056 $1,995,631
Sales discounts and returns.......................................... 2,044,416 2,645,072
Compensation......................................................... 808,797 1,158,203
Taxes other than income.............................................. 138,307 114,137
Interest............................................................. 24,000 175,285
Royalties............................................................ 109,483 174,276
Health insurance claims.............................................. 201,083 198,060
Property and equipment purchases..................................... 139,406 203,762
Catalog expenses..................................................... 1,066 163,418
Other................................................................ 380,155 609,120
---------- ----------
Total accounts payable and accrued expenses.......................... $5,569,769 $7,436,964
========== ==========
</TABLE>
9. LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Note payable to bank at bank base rate (8.5% at December 31, 1994),
secured by all corporate assets, payable $133,334 monthly plus
interest; final payment due July 1998............................. $5,399,986 $ --
Note payable to bank at .5% below bank base rate (8.25% at December
31, 1995), secured by all corporate assets, payable $136,111
monthly plus interest; final payment due September 2000........... -- 7,758,316
Note payable to Lilly at 7%; payable in installments of $4,000,000
in August 1996 and $3,000,000 in August 1997...................... -- 7,000,000
Note payable to former shareholder of pooled company at 6.81% 3,113,662 2,475,520
Note payable to former shareholder of pooled company at 5.49% interest;
due on demand..................................................... 11,238 --
---------- -----------
8,524,886 17,233,836
Less current maturities............................................. 1,746,551 5,813,474
---------- -----------
Total long-term debt................................................ $6,778,335 $11,420,362
========== ===========
</TABLE>
Approximately $1,167,000 of the $5,399,986 of long-term debt outstanding at
December 31, 1994 was refinanced in connection with the 1995 bank note payable.
Maturities of long-term debt at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 5,813,474
1997............................................................. 4,826,133
1998............................................................. 1,839,680
1999............................................................. 1,854,179
2000............................................................. 1,461,364
Thereafter ...................................................... 1,439,006
-----------
$17,233,836
===========
</TABLE>
<PAGE> 11
JONES MEDICAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 16, 1995, the Company increased its available borrowings under the
March 16, 1993 credit arrangement from $2.0 million to $4.0 million. Interest on
outstanding borrowings is based on the bank base rate and is payable monthly.
Borrowings on the line of credit are secured by substantially all of the assets
of the Company. There were no borrowings under the line of credit agreement in
1994 and 1995.
The bank credit agreement including the note payable to bank and the line
of credit arrangement contain certain restrictive provisions including
maintaining a maximum tangible net worth ratio, maintaining a minimum current
ratio, obtaining prior approval of acquisition financings in excess of $3.0
million and limiting the amount of additional borrowings. The Company will be in
default under its revolving credit and borrowing lines if (i) Dennis Jones
ceases to be the Company's Chairman of the Board and Chief Executive Officer, or
(ii) Dennis Jones and Judith Jones, collectively, own less than 15% of the
outstanding shares of Common Stock of the Company, or (iii) a third party
acquires 50% or more of the shares of the Company's capital stock without the
lender's prior approval.
10. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The cumulative effect of adopting Statement No. 109 as of January 1,
1993 was to increase net income by $207,100.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization....................... $4,134,736 $4,474,077
Deferred tax assets:
Accrued sales discounts............................. 762,699 992,026
Deferred compensation on stock options.............. 85,020 85,870
Unicap adjustment on inventory...................... 174,552 260,144
Allowance for doubtful accounts..................... 41,492 70,300
Other............................................... 134,854 137,760
---------- ----------
1,198,617 1,546,100
---------- ----------
Net deferred tax liabilities.......................... $2,936,119 $2,927,977
========== ==========
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................. $4,154,146 $4,145,121 $6,628,414
State.................................... 549,594 485,883 790,082
---------- ---------- ----------
Total current......................... 4,703,740 4,631,004 7,418,496
---------- ---------- ----------
Deferred:
Federal.................................. (34,796) (236,182) (7,804)
State.................................... (8,118) (34,654) (201)
---------- ---------- ----------
Total deferred........................ 42,914 (270,836) (8,005)
---------- ---------- ----------
Total provision for income taxes........... $4,660,826 $4,360,168 $7,410,491
========== ========== ==========
</TABLE>
<PAGE> 12
JONES MEDICAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the difference between the United States federal
statutory tax rates and the effective income tax rate as a percentage of net
income before cumulative effect of change in accounting principle is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
United States federal statutory tax rate................... 34.0% 34.0% 35.0%
State income taxes, net of federal tax benefit............. 4.1 3.8 4.0
Other, net................................................. -- (1.1) (1.6)
---- ---- ----
38.1% 36.7% 37.4%
==== ==== ====
</TABLE>
11. PREFERRED STOCK
The Company's Convertible Cumulative Preferred Stock, Series A, bears
dividends at an annual dividend rate of $0.16 per share. Each preferred share
has voting rights equal to one share of Common Stock and is convertible into
1.75 shares (3.938 shares after giving retroactive effect to the three-for-two
stock split declared February 7, 1996 and the three-for-two stock split
declared May 22, 1996) of the Company's Common Stock.
During 1995, the Company reached a settlement regarding a portion of the
contingent purchase price payable to the former stockholders of GenTrac. In
connection with the settlement, 44,004 shares of the Company's Preferred Stock
held in an escrow account, pending final dispute resolution, were released from
escrow and returned to the Company. These shares of Preferred Stock with an
original cost of $381,277 have been canceled by the Company. The accompanying
1995 financial statements reflect the resulting $381,277 reduction of goodwill
associated with the contingent purchase price and reduction in Preferred Stock.
12. STOCK OPTION PLANS
The Company has various incentive stock option ("ISO") plans for executives
and employees. In connection with the ISO plans, options to purchase Common
Stock are granted at option prices not less than the fair market values of the
Common Stock at the time the options are granted and vest ratably over a
five-year period from the grant dates. At December 31, 1995, options for 255,749
shares of Common Stock are available for future grant. There were 719,775
options granted but unexercised under the ISO plans at December 31, 1995, of
which 83,250 were exercised subsequent to December 31, 1995.
In addition, the Company has various nonqualified stock option ("NSO")
plans for certain officers and independent directors. Certain of these options
offer exercise prices below the fair market value of the Common Stock at the
date of grant. In accordance with APB 25, differences between the option prices
and the fair market values at the dates of grant have been accrued ratably over
the five-year vesting periods. Total compensation expense in 1993, 1994, and
1995 related to the NSO plans was $67,000, $122,000, and $123,500, respectively.
At December 31, 1995, there were 155,250 options granted but unexercised under
the NSO plans, of which 112,500 shares were exercised subsequent to December 31,
1995.
<PAGE> 13
JONES MEDICAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity for 1993, 1994, and 1995 was as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Outstanding options, January 1.................. 1,134,000 1,084,500 973,215
Exercised..................................... (229,500) (144,225) (281,565)
Granted....................................... 245,250 196,875 194,625
Cancelled..................................... (65,250) (163,935) (11,250)
--------- --------- --------
Outstanding options, December 31................ 1,084,500 973,215 875,025
========= ========= ========
Weighted average price of options exercised..... $2.52 $1.99 $1.58
===== ===== =====
Weighted average price of options granted....... $4.61 $3.73 $3.67
===== ===== =====
Weighted average price of options cancelled..... $1.61 $5.37 $2.85
===== ===== =====
</TABLE>
Outstanding options at December 31, 1995 are exercisable as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF OPTION RANGE OF
SHARES PRICE OPTION PRICE
--------- -------- --------------
<S> <C> <C> <C>
1995....................................... 494,100 $2.21 $0.22 - $5.67
1996....................................... 92,475 $3.26 $2.33 - $6.67
1997....................................... 77,850 $3.38 $2.33 - $6.67
1998....................................... 83,700 $3.41 $2.33 - $6.67
1999....................................... 73,800 $3.70 $2.89 - $6.67
2000....................................... 53,100 $3.80 $2.89 - $6.67
------- -----
875,025 $2.76
======= =====
</TABLE>
Subsequent to December 31, 1995, options to purchase 105,750 shares of
Common Stock were granted to certain employees of the Company under the ISO
plan. The option price of $10.67 per share represents the fair market value of
the stock on the date the options were granted. The options vest over periods of
five to seven years from the grant date.
In addition, subsequent to December 31, 1995, options to purchase 675,000
shares of Common Stock were granted to certain officers of the Company under
time accelerated stock option agreements pursuant the Company's 1994 Incentive
Stock Plan. The option price of $10.67 per share represents the fair market
value of the stock on the date the options were granted. The options become
exercisable at the end of eight years from the grant date; however, the options
may become exercisable if certain targeted Common Stock prices are attained as
follows: $30 for the 1997 installment, $40 for the 1998 installment, $48 for
the 1999 installment, $60 for the 2000 installment, and $75 for the 2001
installment.
13. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering substantially all
employees. The plan provides the Company match 100 percent of the employee
voluntary contributions up to a maximum matching contribution of 5 percent of
the employee's compensation. Company contributions in 1993, 1994, and 1995 were
approximately $172,000, $200,000, and $224,000, respectively.
<PAGE> 14
JONES MEDICAL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. Contingencies and Commitments
At December 31, 1995 the Company carried product liability coverage of
$10,000,000 per occurrence and $10,000,000 in the aggregate on a "claims made"
basis. There is no assurance that the Company's present insurance will cover
any potential claims that may be asserted in the future: In addition, the
Company is subject to legal proceedings and claims which arise in the ordinary
course of its business.
Under development and distribution agreements between GenTrac and Johnson &
Johnson entered into prior to the Company's acquisition of GenTrac, Johnson &
Johnson acquired certain rights to new thrombin products and thrombin product
improvements developed by GenTrac. Johnson & Johnson has notified the Company
that it believes that it is entitled to exclusive distribution rights for
Thrombin-JMI and a liquid thrombin product for which FDA approval is currently
pending. Although the Company strongly disagrees with and will vigorously
contest such claims by Johnson & Johnson, any resolution of the claims in favor
of Johnson & Johnson could have a materially adverse effect upon the Company's
business, financial condition and results of operations.
The Company currently relies on Lilly for the manufacture of Brevital. The
Company has entered into a 10-year manufacturing agreement with Lilly, which may
be terminated by Lilly at any time after the first five years by giving at least
five years notice to the Company prior to ceasing the manufacture of Brevital.
In the event of such termination, Lilly must use reasonable efforts to assist
the Company in obtaining all the necessary licenses and approvals to enable the
Company or an alternative manufacturer to manufacture Brevital. Lilly is the
sole manufacturer of Brevital and any alternative manufacturer would require
regulatory change-in-site qualification to manufacture the product. In the event
of any interruption in the supply of Brevital from Lilly due to regulatory or
other causes, there can be no assurance that the Company could make alternative
manufacturing arrangements on a timely basis, if at all. Such an interruption
would have a material adverse effect on the Company's business, financial
condition and results of operations.
In connection with certain product line acquisitions, the Company is
obligated to pay royalties of up to 10 percent of certain product sales through
2005. Total royalty expense in 1993, 1994, and 1995 was approximately $621,000,
$636,000, and $593,000, respectively.
<PAGE> 15
15. SUBSEQUENT EVENTS (UNAUDITED)
Common Stock Split
On April 3, 1996 and April 23, 1996 the Company sold a total of 3,450,000
shares of common stock as contemplated in the Company's Registration on Form
S-3. Net proceeds of the common stock offering were approximately
$75,000,000.
Abana Acquisition
On October 28, 1996 the Company announced an agreement with Abana
Pharmaceuticals, Inc. ("Abana") and the holders of a majority of Abana's
outstanding common stock to acquire Abana by means of a merger of Abana into a
subsidiary of the Company. Under the terms of the agreement, the Company will
issue approximately 420,000 shares of its common stock to Abana's stockholders
to acquire a 100% ownership interest in Abana. Although Abana's founders and
principal stockholders currently hold a majority of the outstanding shares of
Abana and have adopted and approved the transaction, final closing of the
transaction will be deferred until a registration statement relating to the
transaction under federal securities law is filed and formal notice is given to
Abana's shareholders in accordance with Delaware law. The agreement
contemplates that the transaction will become effective at or near December 31,
1996.
Abana, headquartered in Birmingham, Alabama is a growing regional marketer of
seven specialty prescription pharmaceuticals, principally consisting of
respiratory care products.
